From China to ASEAN: Rebalancing India’s trade

New Delhi has actively worked with Beijing to address its massive bilateral trade deficit. However, it has another option. India can seek greater economic integration with ASEAN and substitute its imports from China with that of ASEAN. The India-ASEAN Summit on December 20 would be a good place to start.

In August 2012, at the ninth meeting of the India-China Joint Group on Economic Relations, Trade, Science and Technology in New Delhi, the main point of concern for India’s Minister of Commerce and Industry, Anand Sharma, was the widening trade deficit between the two countries – $40 billion for the year ending in March 2012. India’s trade deficit with China has increased by a massive 4,000% in the last 10 years.

At the meeting, the Indian and Chinese commerce ministers agreed to set up a joint working group to address trade issues, including the trade deficit. However, India has another option. Instead of relying on the working group to fix India’s trade woes, New Delhi can actively seek greater economic integration with the Association of Southeast Asian Nations (ASEAN). It is important for India to pursue this option at the next ASEAN-India Summit scheduled to be held in New Delhi on December 20-21.

Nearly all the goods that India imports from China could potentially be imported from ASEAN countries. Substituting Chinese imports with ASEAN imports will not decrease India’s absolute trade deficit, but it will reduce the enormous bilateral trade deficit with China. This will result in a more equal trading relationship. UN data indicates that currently more than 50% of India’s imports in 36 product categories come from China. For trade security and diversification, it is important for India to find more sources for some of these products.

In addition to the financial imbalances created by the trade deficit, there is another major problem with the current trading relationship between India and China. According to the United Nations Conference on Trade and Development, the main products that India exports to China are primary commodities, which are subject to greater price fluctuations and are low on the value chain. In 2011, iron ore alone accounted for 41% of India’s $23 billion worth of exports to China, while cotton and copper accounted for 11.5% and 9% respectively.

According to UN data, China exported more than $7 billion worth of telecommunications equipment and $2 billion in computers to India in 2011, which represents 55% of total imports in these two product categories. Huawei and ZTE, two of the largest Chinese telecommunications companies and major exporters to India, are at the centre of a recent report by the Intelligence Committee of the U.S. House of Representatives that highlights the potential security risks to the U.S. of equipment imported from the two firms. These risks might be overestimated, but it is in India’s interests to be cautious. To reduce its reliance on Chinese equipment, India can look to ASEAN nations, which exported telecommunications equipment worth $25 billion and $33 billion in computers across the world in 2011.

India also heavily relies on chemical imports from China (see table), which are essential to make fertilisers. In 2011, more than 50% of Indian imports of four product categories that include chemicals like nitrogen compounds, heterocyclic compounds, and metallic salts came from China. This reliance on a single source can eventually impact food security in India. ASEAN countries export more than enough of the chemicals in these categories for India to begin diversifying its import sources to ASEAN.

A similar situation exists in other high-value product categories such as electrical machinery, boilers, and medicinal and pharmaceutical products – each of which represents over a billion dollars in imports a year from China (see table).

In April 2002, the Indian government’s overtures resulted in the Comprehensive Economic Cooperation Agreement (CECA) with Singapore, followed by a Framework Agreement on a Free Trade Areas with Thailand in October 2003. However, even after a raft of trade negotiations – culminating in the 2009 India-ASEAN Free Trade Agreement (FTA) in Goods – and infrastructure projects to increase connectivity, trade between India and ASEAN remains moribund.

Despite its enormous market, India is still only the ninth largest export destination for ASEAN, purchasing just 3% of ASEAN’s total exports. Meanwhile, China has become India’s number one source of imports after China’s entry into the World Trade Organisation in 2001 and due to the sheer size of the Chinese export market relative to other countries.

But there are signs that things are changing – in addition to Singapore and Thailand, New Delhi now has bilateral arrangements with other Asian countries including Myanmar, Sri Lanka, Bangladesh, Japan and Malaysia. Evidence suggests that such trade agreements have had a positive, sometimes dramatic, impact on trade.

For example, after the Delhi Declaration in 2005 and the Riyadh Declaration in 2010, bilateral trade between Saudi Arabia and India rose from $13 billion in 2006 to $32 billion in 2011 (though this was partly driven by India’s increasing demand for oil). Following the Singapore-India CECA deal in 2004, bilateral trade grew from $7.5 billion in 2004 to $13 billion in 2007. After the 1999 Sri Lanka-India trade deal bilateral trade rose from just over $400 million in 1999 to $2.5 billion in 2006.

For now, the Indian government has focused on FTA for services, rather than goods, because it sees this is as a strong export area. Although increasing exports is important, reducing India’s reliance on Chinese imports is also important. To achieve this, India will have to massively boost its infrastructure to reduce the cost and ease with which goods from ASEAN can be imported. Myanmar and Thailand, for example, have recently signed an agreement to develop an $8.6 billion port facility at Dawei – 155 miles from Bangkok – which will allow ASEAN shipping to avoid the congested Malacca straits.

India can also cultivate private investment to construct and expand existing port facilities, especially to supplement the terminals at Chennai and Haldia. India will also require sustained investment in road transport infrastructure; in the short term India can construct roads linking the poorly-connected North East with Myanmar and the rest of India. This will provide an important land route to the ASEAN economies. In addition, industry groups like the Federation of Indian Chambers of Commerce and Industry (FICCI) can play a role in making FTAs more transparent to Indian businesses, especially small and medium enterprises (SMEs), which are usually less likely than multinationals to take advantage of India’s trade agreements.

The India-ASEAN FTA in Services, which is likely to be signed on December 20 at the India-ASEAN Commemorative Summit, could be a huge fillip for trade in commercial services. But if India is serious about increasing trade with ASEAN, it needs to do more than sign trade agreements.

Spike Nowak is a Research Intern, Gateway House: Indian Council on Global Relations, Mumbai and is completing his Master’s degree in International Relations at the Johns Hopkins School of International Studies in Nanjing, China.

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.